August 11, 2014
Commensurate with the growth of franchising as a major part of the Canadian economy, franchise legislation is now in force in five of the 10 provinces (Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island), with a sixth (British Columbia) committed to introduce it by the end of 2015. Also commensurate with the growth of franchising, unfortunately, is an increasing number of disputes between franchisors and their franchisees.
Most of these, as heard by the courts, are on an individual franchisee-franchisor basis, but some disputes involve issues common to virtually all of the past and/or present franchisees within a system. In these cases, actions may be commenced on a group or multi-plaintiff basis, often under class action legislation. Given these circumstances, franchisors should be focusing more attention on ways to avoid or resolve potential litigation at an early stage.
To do so and to minimize the negative effects of litigation on the parties involved—and on the franchising sector in general—both the Canadian Franchise Association (CFA) and the International Franchise Association (IFA) have established ombudsman programs for franchisors and franchisees to use, at no charge. As these programs face certain limitations in terms of time and resources, however, some franchise systems have also created their own independent ombudsman programs, for use only by the franchisor and franchisees within the system.
Reasons to resolve
Another impetus for franchisors to resolve disputes with franchisees at an early stage—and particularly before they become lawsuits—is the impact of these disputes on their franchise disclosure documents. Under all current provincial franchise legislation, one of the required items to be included in these disclosure documents is a statement, including details, regarding whether the franchisor or a director, general partner or officer of the franchisor has ever been convicted of fraud, unfair or deceptive business practices or any violation of a law that regulates franchises or business; or if there is a charge pending against the person involving such a matter.
Further, a disclosure document must contain a statement, including details, regarding whether any such person has been subject to an administrative order or penalty imposed under a law of any jurisdiction regulating franchises or business; or if the person is the subject of any pending administration actions under such a law.
Finally, a statement must be disclosed, including a description of details, indicating whether any such person has been found liable in a civil action of misrepresentation, unfair or deceptive business practices or violating a law that regulates franchises or businesses, including a failure to provide proper disclosure to a franchisee; or if a civil action involving such allegations is pending against the franchisor.
Franchisors would prefer not to have descriptions of these matters—especially civil lawsuits—included in their franchise disclosure documents, not just because of the negative effect on prospective franchisees, but also because, in certain cases, such actions may disentitle the franchisors from relying on an exemption from the requirement to disclose financial statements.
If a franchise dispute is resolved without court process, on the other hand, the dispute will be confidential and private to the parties, not subject to inclusion in a franchise disclosure document.
What is an ombudsman?
An ombudsman is a neutral, independent resource who provides informal, confidential, third-party assistance for the resolution of concerns and complaints. In a franchise relationship, as in any other business relationship, there is the potential for disputes, but an ombudsman program addresses this potential by offering services to help resolve problems as early as possible, in an amicable and expeditious fashion.
The ombudsman helps facilitate a resolution by first discussing the issues in dispute and then suggesting possible solutions to the problem(s). If a solution cannot be found at this stage, then the ombudsman may instead refer the unresolved complaints and problems to alternative methods of dispute resolution, like mediation, where possible. When making recommendations, the ombudsman has the responsibility to suggest actions or policies that will be equitable to all parties.
As such, the ombudsman must be impartial and neutral and not take sides. There are no formal investigations, no formal decisions and no repercussions for franchisees who bring issues to him/her. And from the franchisor’s perspective, an ombudsman program can act as an early warning system of franchisee concerns.
As mentioned, in franchise systems that have established their own independent ombudsman programs, the franchisees do not have to pay extra to use it. Rather, the ombudsman is typically under contract—i.e. as an independent contractor, not an employee—and his/her services are paid for by the franchisor.
A franchise system’s ombudsman should have franchise industry experience and, of course, will need to become familiar with the system involved. He/she must not have any conflicts of interest and must be respected by both sides.
As a designated, neutral third party, the ombudsman has the responsibility of maintaining privacy and strict confidentiality concerning matters that are brought to his/her attention, unless otherwise given permission. Usually, the only exception—at the sole discretion of the ombudsman—is where there appears to be threat of serious harm.
The ombudsman must take all reasonable steps to protect any records and files pertaining to confidential discussions from inspection by other persons. Further, he/she should not testify in any formal judicial or administrative hearing about concerns brought to his/her attention.
In effect, the ombudsman operates as a go-between, meeting with each side independently to better understand the facts, consider the problem and attempt to facilitate an effective solution. Often, the first conversation is used to identify the root of the problem and discuss broad options. The ombudsman cannot provide legal advice, make management decisions or advocate for anyone in a dispute.
Developing an ombudsman program
For this kind of program to be successful, there must be a commitment by senior management at the franchisor level and the ombudsman must be acceptable to the franchisees. Endorsement of the program by a franchise advisory council (FAC) is highly recommended, if such a council exists for the system in question. The ombudsman must also have ongoing access to a dedicated senior member of the franchisor’s management team, one with the authority to make decisions or obtain instructions quickly and effectively.
There are a few key steps that must be taken when designing the ombudsman process. After the requirements for the program have been determined, the key stakeholders must commit to the program and the franchisor must allocate funding. The terms of reference for the process and procedure must also be resolved, in writing, and enshrined in the franchise agreement, an ancillary document or a policy adopted by the franchisor. Provincial franchise legislation will require a description of the program to be included in the franchisor’s disclosure document.
Before the program is underway, the parties should also determine how to assess the ‘metrics’ that will apply for assessing the success of the ombudsman. There should be some periodic, confidential reporting on a generic basis to the stakeholders about the ongoing use of the program; and, on at least an annual basis, the ombudsman should offer a report about the success of the program based on the metrics previously determined by the parties.
The stakeholders may also decide to designate a stated term (i.e. duration) for the program, allowing for a determination at the end of that term whether or not the program will continue and, if so, allowing for modifications to be made if needed.
Benefits vs. drawbacks
The clear benefits of a franchise system’s ombudsman program include the increased integrity it brings to the franchise system; the proven success of other programs in the past; and the relatively minor cost of such a program in comparison to the direct and indirect costs and risks of the litigation an ombudsman can help avoid.
Franchise litigation can be very uncertain, costly and disruptive for both franchisees and franchisors. Achieving results may take months, in the case of interim orders, or years, in the case of trials. The costs can easily run into hundreds of thousands of dollars. The downtime involved for franchisor executives and franchisees can be staggering.
Disputes involving current franchisees can—and most often will—have a very negative effect on the ongoing franchise relationship. If publicized through print and electronic media, which is particularly likely when it comes to well-known franchise brands, they can also diminish customer loyalty and lead to lower system-wide revenues.
The resolution of disputes at a very early stage through the use of an independent franchise system ombudsman program, on the other hand, will allow the parties involved to focus on their ongoing business needs. In light of all of these factors, more systems’ franchisors and franchisees should consider designing an independent ombudsman program in the future.
- What does an ombudsman do?
- What is necessary to make an independent ombudsman program effective?
- How can metrics be incorporated into the program?